Liam Byrne: The hon. Gentleman is right to say that global migration has changed; it has doubled since the 1960s. Net migration into this country is pretty much in line with the Organisation for Economic Co-operation and Development average. Of course, as global movement becomes easier, people will seek to exploit it, and that is exactly why my right hon. Friend the Home Secretary and the Under-Secretary of State for the Home Department, my hon. Friend the Member for Gedling (Mr. Coaker) have brought forward the UK action plan on trafficking. That will have to be backed up by increased resources for immigration policing, which is why our measures are so important. It was a disappointment that the Liberal Democrats opposed them. Biometric identity technology will be important too, because it will help us to understand with confidence precisely who is coming into and leaving the country. That will make the business of enforcement much easier, and I urge the Conservatives to support our plans.

Anthony Steen: In his parliamentary answer in February, the Minister said that he would publish the research report on the exploitation and abuse of children in this country by a funded organisation, the Child Exploitation and Online Protection Centre—CEOP—and that that would give us an idea of the nature and scale of child abuse and exploitation.He undertook to publish it by April. Will he produce the rabbit out of his hat this afternoon?

Vernon Coaker: We are trying to make progress through self-regulation and, as my hon. Friend knows, we have good relationships with internet service providers and mobile telephone operators. We have a target that by the end of 2007 all of our operators will have blocking mechanisms in place. Good progress is being made: almost 90 per cent. of those images are being blocked by our ISPs. They also provide that if people access such sites a message pops up informing them that they have accessed illegal material. We are considering what message ought to pop up on the computer screen, and the examining the possibility of making it a tougher law enforcement message. However, to answer my hon. Friend's question, what is important is the relationships that we have with our international partners. The key to tackling this problem lies in greater co-operation with other countries.

John Healey: I beg your pardon, Sir Alan.
	 Ordered,
	That the order in which proceedings in the Committee of the whole House on the Finance Bill are taken shall be: Clauses 3, 1, 7 and 8; Schedule 1; Clauses 25 and 67; Schedule 18; Clauses 12 and 81 to 83; Schedule 22; Clause 84; Schedule 23; Clauses 20 and 21; and new Clauses relating to microgeneration.— [John Healey.]

Mark Hoban: The hon. Gentleman is right. I am not sure that those figures include limited liability partnerships, but I certainly do not think that the numbers have increased. I do not think that it is a huge number, and it certainly would not have a distorting effect on the most recent year, as the hon. Gentleman is perhaps suggesting.
	Let us look at the arguments that have been used. Simon Sweetman from the Federation of Small Businesses made this response to the change:
	"On the face of it, the rise in the small companies rate is very disappointing for our members, because it is addressing a problem that I don't think exists, which is the notion that people incorporate for tax reasons. It was certainly true at one point, but I don't think it happens any more."
	The British Chambers of Commerce further argued that the rise in the small companies tax rate
	"sends out a negative message to the small business community. Closing a loophole, which was initially created by Government incentives, penalises small businesses unnecessarily."
	It went on to say that it does not understand
	"why the Government chose to use a blunt instrument impacting on all small businesses rather than focussing their resources on targeting those who are using Managed-Service Companies as a front for tax avoidance".
	There is a serious doubt in the small business community, therefore, about whether tax motivated incorporation still persists as an issue and, if it does, that that is the way to tackle it, as there may be other ways of doing so.
	The Chancellor sold the package to small businesses because of the offsetting tax changes, such as the extension of the 50 per cent. first year capital allowance for this year and the changes in subsequent years, and the changes in the research and development tax credit. It is worth remembering the impact that such change will have on the profitability of businesses and their ability to invest for the future. In its comment on the Budget, the Association of Convenience Stores pointed out that
	"convenience stores generally operate on a 1 to 2 per cent. net profit margin, and the increase in the rate of corporation tax on small business will further erode this."
	How on earth will they find the profits to survive as a business and create new earnings for the owners and shareholders, and will they be able to retain sufficient profits to enable them to grow and develop in the future?
	Many service sector companies will face that problem as a consequence of the change. I am not sure that they will benefit from the more generous capital allowances or the changes to the research and development tax credit. For many service sector companies, investment on such a scale is rare, and the Government should remember the importance of the service sector to the economy as a whole. As I said earlier, about 75 per cent. of the economy is accounted for by the service sector, so if the Government start to attack that sector and restrict its ability to grow and develop, they are creating a long-term problem.
	We can all identify service companies in our own constituencies that might not benefit from the change, such as hairdressers or caterers. Let us take a business that I know—a conference business run by a friend of mine. It does not need to invest very much in physical assets, but its retained profits are necessary to provide the capital to expand the business and generate the money that can be used to take risks in growing the business. Service sector businesses will be worse off as a consequence of the Budget. They will suffer the tax rise, but they will not be eligible for the reliefs that the Chancellor increased in the Budget.
	One argument for the tax increase is that it will tackle tax-motivated incorporation. The other argument deployed by the Chancellor is that there will be other moves to compensate for that. When we consider clause 3 in the round, we should remember the arguments put by the Chancellor. It is important to remember that the changes to capital allowances are a timing difference. Capital allowances change the phasing of permissible capital expenditure for taxation. Increasing the first year allowances accelerates the tax relief; it does not increase the amount available for tax relief over the lifetime of the asset. It is a timing difference, not a tax cut.
	Victor Dauppe, a tax principal at MacIntyre Hudson, was right when he said:
	"Extra corporation tax is permanent, and the increased capital allowances are either temporary, not yet in place or unavailable for some companies."
	The Financial Secretary to the Treasury agreed with that. In last week's Second Reading debate he said that
	"the changes to capital allowances have a largely temporary timing effect".—[ Official Report, 23 April 2007; Vol. 459, c. 758.]
	That indicates the deal that is on offer to small companies. They see a permanent increase in their rate of corporation tax which is offset—if they are eligible to make a claim—by a temporary short-term timing difference that improves their cash flow today, but is reversed later.

Helen Goodman: The tax system will work only when the rules are perceived to be fair. People who abuse the small companies rate by moving from unincorporated to incorporated status purely to pay less income tax and avoid paying national insurance contributions are engaging in precisely the kind of tax-induced activity that does not promote a stronger economy or flourishing enterprise. It is completely unfair if some people can lower their tax bill by moving from unincorporated to incorporated status, while Joe Bloggs, who has to pay his tax through PAYE, does not have that opportunity. That is the essential point at issue in this tax change.
	The Chancellor of the Exchequer made it clear in his Budget speech in March that he was introducing the change
	"to deal with individuals artificially incorporating as small companies to avoid paying their due share of tax."—[ Official Report, 21 March 2007; Vol. 458, c. 815.]
	The clause raises the small companies rate from 19 to 20 per cent. this month, with further increases to 21 and 22 per cent.—

Brooks Newmark: As we are talking about corporation tax, I draw Members' attention to my entry in the Register of Members' Interests.
	One of the keys to having fair taxation is stability. Robert Chote of the Institute for Fiscal Studies told the Treasury Committee during its hearing on the 2005 pre-Budget report:
	"A little bit of stability in this area would now be welcome."
	It is now two years later, and it would still be welcome.
	Speaking during the debate on last year's Finance Bill, the Financial Secretary mentioned the responses that the Government had received to the consultation paper on the taxation of small business issued in 2004. He said that businesses had
	"a strong preference for simplicity over approaches that risked introducing further complexity."—[ Official Report, 2 May 2006; Vol. 445, c. 926.]
	That is a principle on which we can all agree, but it is not one that has much currency at the Treasury, it would seem. This year's Finance Bill has been reduced to one volume but, unfortunately, the House of Commons Library has had to produce two volumes of briefing notes on the taxation of small businesses—one covering changes between 2000 and 2006, and a second covering recent developments, which no doubt the hon. Member for Wolverhampton, South-West (Rob Marris) has perused in detail.
	This is the third time that I have been involved in a Finance Bill debate, and I am already developing a sense of déjà vu. The first instalment of the phased increase of the small companies rate in clause 3 will push small businesses one step closer to where they started, before they were hit with a decade of chopping-and-changing confusion from the Chancellor. The reason for all this confusion is disarmingly simple: tax incentives originally intended to encourage business investment and business growth suddenly became perceived as loopholes. It is tempting to say that one man's incentive is another's loophole, but unfortunately the Chancellor's incentives always seem to become his loopholes if they are given a little time.
	It did not matter that everyone warned the Chancellor that radical changes to the small companies rate would act as a direct incentive for incorporation; in fact, there has probably never been so many Cassandras offering unheeded prophecy. He went ahead anyway, and all the changes since then have attempted to restore a balance between incentivising small businesses and preventing the erosion of the tax base, both of which I can recognise as sane objectives on the Treasury's part. The IFS "green Budget" contained the plea that
	"we can only hope that the Treasury will draw appropriate lessons from this unfortunate experience."
	However, I question whether the lesson has actually been learned. For several years now, the reaction to the Chancellor's treatment of small business taxation has been dominated by one image: the U-turn. For a little variety, last year I dubbed the abolition of the non-corporate distribution rate a three-point turn. This year, it has become even clearer that the Chancellor is simply going round in circles.
	However, my real concern is that providing incentives to small business is no longer front and centre in the Treasury's strategy, and that the emphasis has now shifted on to deciding whether using a tax incentive constitutes avoidance. It all comes back to the Chancellor's nebulous reasoning about what constitutes a "fair and appropriate" share of tax, or simply the "right amount" of tax. This is an unfocused way of looking at the broader issue of what small businesses contribute to the economy and what the Government should do to help them. The Paymaster General—unfortunately, she is not with us today—said back in 2004, in the middle of the long-winded debacle surrounding the small companies rate—that
	"The deliberate and cumulative aim is to underpin all the measures that the Government have taken to encourage businesses to grow and to be more enterprising and productive in the medium and long term and not to operate year by year by playing around with the tax system."—[ Official Report, 27 April 2004; Vol. 420, c. 846.]
	On this point, I have to agree with her; indeed, that is a more useful guiding principle and intention.
	However, we would be forgiven for thinking that there is something wrong with the Treasury's deliberation, and that its policies have not been cumulative at all. Certainty and continuity in the tax system are helpful to all businesses but particularly small ones, which have less capacity to adapt quickly or take specialist tax advice. The rate changes and forthcoming proposals for a new annual investment allowance only deepen the artificial gulf between small businesses and larger firms.
	The Chancellor has in fact taken the muddle of the small companies rate and created a paradox. Reducing the main rate of corporation tax and capital allowances leads to a cut in the tax rate and to an increase in the tax base for larger businesses. However, small businesses are being pulled in the opposite direction through an increase in the tax rate and a narrowing of the tax base, because fewer businesses will be able to make full use of the new investment allowances of which we have heard much during this afternoon's debate. The Chancellor has made the fatal assumption that because all small businesses, in whatever sector, will theoretically be able to make use of the investment allowance, all will do so. That was the justification he gave to my hon. Friend the Member for Gosport (Peter Viggers) during the Treasury Committee's inquiry. The Chancellor also defended the changes on the grounds that they appear to be revenue-neutral—perhaps that is just another example of a tax cut being a tax con. However, even if we are inclined to accept that reasoning, the AIA will not take effect until next year, leaving a guaranteed tax rise over the next year.
	I want to probe behind the modelling that led to the assumption of revenue neutrality and establish exactly how many of the UK's 1.3 million incorporated businesses are expected to make use of the allowance and to what extent. Perhaps the information will be forthcoming later when the Minister responds to the debate.

Colin Breed: I want to build on some of the remarks made by my hon. Friend the Member for Falmouth and Camborne (Julia Goldsworthy). Cornwall was fortunate—if we look at it one way—in achieving objective 1 status a few years ago. On the back of that, we had the wonderful opportunity to develop the combined universities in Cornwall to try to build some of the knowledge base and future GDP of the county, and to build up the economy. Much of that was going to be centred around relatively fledgling businesses in new knowledge-based industries, such as renewable energy, IT consultancy and marketing. Many of those small businesses have just started. They really are fledgling in that sense. Their business plans would have been predicated on certain assumptions about the tax that the businesses would be paying.
	Those businesses are perhaps two or three years old now. They are not capital-intensive businesses, but they tend to want to employ relatively expensive new personnel. When new personnel come into a company, they are not immediately productive, but, of course, their salaries and their expenses have to be paid out by the company. Some of the small businesses are going to begin to stutter a little when it comes to their ability to fund some of that revenue, which would have been thought to come from the profits that they would initially begin to generate. That will no longer be the case, because some of that money will have to be paid in tax.
	It is part of the issue about stability that when people are looking to create their business plans and looking to the quite considerable growth of these sorts of businesses, they consider the expenses that they will have to pay. Tax is one such expense. They would undoubtedly have made their business plans on the basis that they would not be paying tax quite as quickly as they are now going to be. I think that that will stunt some potential growth and undermine investment from European objective 1 funding. The investment's new guise of convergence funding is even more titled towards such businesses, rather than the old capital-intensive businesses. That funding is designed to generate more knowledge-based industries. If we are to have this new tax regime, the real benefit of boosting the economy of Cornwall, which is the essence of convergence funding, will be undermined.

Rob Marris: In one sense, the hon. Gentleman might be right, but, in another sense, he is completely wrong. A small business cannot export a great deal because, of course, it would therefore not be a small business. However, such a business might export a large proportion of its output. I was careful to say that I suspect that most small businesses in the service sector do not export a great deal.
	During the interesting remarks made by the hon. Member for Sevenoaks (Mr. Fallon), he used the adjective "distortive", which was a new word to me. I entirely reject the approach to economics that he cited, which is based on a view that is peddled by academic economists of the worst sort that there is such a thing as a perfect market and that that perfect market can thus be distorted. If one rejects the notion that there is such a thing as a perfect market, as I do, there is no such thing as distortion in this context, although there is such a thing as changed behaviour, or certain effects stemming from certain causes.
	Changed behaviour that is driven by a tax regime is nothing new in the United Kingdom. It is often the subject of considerable debate on financial measures relating to green taxes. If the Chancellor proposes fiscal measures to encourage a change in behaviour, that is not wrong in principle, although hon. Members might think that the measures will not produce the desired effect, or that the effect that the Chancellor is trying to achieve is not one that they desire. However, I reject the suggestion—this has been the flavour of part of the debate—that the fiscal measures to change behaviour that are proposed in the clause are somehow, in and of themselves, bad things.

John Healey: We have had a useful and wide-ranging debate which has served to bring out some of the broader issues in the light of which it is necessary to consider clause 3. If you will allow me, Sir Alan, I shall set out those issues as a way of helping hon. Members to consider the provisions of clause 3 in the proper context.
	The hon. Member for Fareham (Mr. Hoban) admitted to having made a mistake that his right hon. Member for Witney (Mr. Cameron) has also made. In fact, there are 4.3 million small businesses in this country, more than three quarters of which are not incorporated, are not small companies and are therefore not subject to the corporation tax regime. They will not be affected by the changes in clause 3, and it is important to recognise that. Furthermore, one in four of those that are incorporated and are therefore small companies currently pay no corporation tax and are unaffected by the changes because they are not making a profit. The hon. Gentleman acknowledged that in this debate, although not on Second Reading.
	An important point, which affects the hon. Gentleman's argument, is that we estimate that the majority of the small companies that remain have incorporated with the purpose of reducing their tax and national insurance liabilities. In other words, those companies take a tax relief that is aimed at investment and growth to reduce their personal tax and national insurance contributions liabilities. In contrast, all small businesses, both self-employed and incorporated—all 4.3 million—can benefit from the associated announcement in the Budget of the new annual investment allowance for expenditure up to £50,000, which many hon. Members have mentioned this afternoon. Many of the self-employed businesses will also benefit from the personal tax changes announced in the Budget.
	If we look more closely at the companies that could be affected by the changes to the small companies rate, we find that in 2004-05 some 750,000 companies paid what is known as the small companies rate, which is really a small profits rate because any company with profits of up to £300,000 in a year benefits from that low corporate tax rate. In fact, a quarter of large companies—those employing more than 250 staff—pay the small companies or small profits rate; and fully around half of medium-sized companies, which have between 50 and 250 employees, pay that rate. The question as regards future tax decisions and reforms is whether we should continue, through the small companies rate, to provide a low rate of corporation tax targeted on low-profit companies, regardless of their investment activity. That fundamental principle underpinned the package of decisions that we announced in the Budget and that we are now incorporating in law through the Finance Bill.
	Since the late 1990s, we have looked carefully at small business taxation, with a view to ensuring a tax system that encourages investment and innovation and provides the fairest possible outcome for all small businesses. The hon. Member for Twickenham (Dr. Cable) said at one point that he thought that we were rushing into making the changes. He carries out his duties diligently, so I am sure that he will have read the consultation document that we published in December 2004, "Small companies, the self-employed and the tax system". It encouraged a wide-ranging debate on how incentives for growth and enterprise can be best targeted while maintaining a system that is as fair as possible for all. The package of changes that we are proposing is a response to that debate, and it comes after careful consideration and detailed discussions with a wide range of interested groups.
	One of the factors that we have to take into account is the degree of tax-motivated incorporation. Lower rates of tax have resulted in a significant number of people incorporating to take advantage of those low rates, not to reinvest in the business, but to extract the company profits in a way that reduces their personal tax and national insurance liabilities, while still allowing them access to contributed benefits. That is contrary to the aims of the reforms that we made to the small companies rate in previous years. Of course, the costs to the public purse are significant; clearly, if all self-employed people decided to incorporate, it could cost the Exchequer billions of pounds in lost revenue, and it would do little to improve productivity or growth. That tax break would be subsidised by ordinary taxpayers and self-employed businesses, which would suffer a competitive disadvantage.
	We propose, in part through clause 3, to refocus the manner in which we provide investment incentives to small businesses. All the revenue raised by the small companies rate increases will be recycled back into small businesses. First, the increase in the small companies rate will reduce the difference in the tax paid by the incorporated and the self-employed. As Members may know, one noted commentator and academic, having considered the impact of the Budget changes on the tax incentive to incorporate, has said on accountingweb.co.uk that there is
	"probably insufficient reason to incorporate at profits of less than £40,000 in the future".
	Secondly, the headline small companies research and development tax credit will increase from 150 per cent. to 175 per cent., which will help small companies, particularly those investing in innovation and new technology. The current first-year capital allowances for small firms will continue at 50 per cent. for a further year. Finally, from April next year, the annual investment allowance will target assistance directly at businesses that invest their profits, regardless of legal form. Under our package of changes, the amount of investment does not have to be significant for a small company to benefit. Some 90 per cent. of tax-paying companies will pay less in tax in the first year in which the annual investment allowance comes into effect if they reinvest as little as 23 per cent. of their profits in their business.
	We know that for many small companies and businesses, whatever their legal form, cash flow is king, and that is part of the reason for the annual investment allowance. Cash flow poses the principal risk and is the principal pressure. At present—the hon. Member for South-East Cornwall (Mr. Breed) was concerned about this—labour costs are fully deductible. Employees' wages and employers' national insurance contributions are deductible from, and offset against, taxable profits. The annual investment allowance provides parity between capital and non-capital expenditure precisely in that way.
	The hon. Member for Twickenham wondered how much of the annual investment allowance would go to small businesses. We calculate that about 90 per cent. of the cost of the annual investment allowance will go to small businesses. For example, in the financial year 2009-10, we estimate the cost of the AIA to be about £920 million, of which an estimated £805 million will go to small firms. We will obviously monitor that, and evaluate it once it has been introduced. May I tell the Committee, too, that the notion that somehow small businesses do not invest is far from the mark? In the last year for which we have firm figures, small companies invested some £6.4 billion in capital expenditure, and we expect the vast majority of small businesses making a capital investment to claim the AIA in future.
	Perhaps we should dwell, too, on the perception—this argument has been made by the Opposition this afternoon—that service companies do not invest, either. Based on the analysis of data by Her Majesty's Revenue and Customs, well over a third of small companies in the businesses service sector invest. Unincorporated businesses in the sector that do invest, invest an average of £3,500 a year. Small companies in the sector invest an average of £22,000 a year. Other service sectors demonstrate perhaps even higher levels of investment. More than half of service firms in the retail sector invest, and more than half of businesses in the hotel and catering sector do so.

Mark Hoban: It has been a wide-ranging debate, reflecting the nature of the arguments used by the Government to support the increase in the small companies rate of corporation tax and the breadth of opposition to that policy. The Minister set out the argument that the Government made a mistake in 2002, when they discriminated in favour of incorporation by introducing the zero per cent. rate of corporation tax. They now seek to reverse that measure by raising the small companies rate. That will have an impact on a wide range of businesses making profits of up to £1.5 million.
	We see a wide-ranging attack on those small companies and an increase in the tax that they will pay. The numbers speak for themselves. There will be an £820 million increase in the tax take from those small businesses, equivalent to £1,000 per company, yet the benefit of the offsetting package amounts to about £60 per small businesses, so businesses will be hit hard. Small companies will see an increase in their tax bill, without the offset.
	As the Financial Secretary indicated, businesses that do not seek to invest in assets will be penalised. They will not benefit from the increased capital allowances on offer. There is discrimination against businesses that seek to grow by employing more staff and against knowledge-based companies. A great bias seems to be developing in the arguments put by Labour Members against the service sector, which, according to the hon. Member for Wolverhampton, South-West, does not contribute much towards exports, whereas we know that service sector businesses of all sizes make a major contribution towards exports. A large number of them export a significant amount of their turnover and play an active role in exploiting those markets.
	The measure is ill thought through and ill conceived. Since the Government were elected in 1997, the large number of changes to the small companies corporation tax rate have sent out a mixed message to those companies. When they see the large companies rate of corporation tax being cut in the Budget, they wonder what the Chancellor thinks small companies are up to. They feel that the Government do not take them seriously and do not believe that they are the backbone of the economy and an important job and wealth creator. For that reason, I propose that we vote against clause 3 stand part.

Stewart Hosie: I am no supporter of the Liberals' proposals and I certainly would not support these amendments, but the Chief Secretary is suggesting that he cannot do this year many of the things that he wants to do because they require primary legislation. Last year's Finance Bill was twice as long—two full volumes—with three volumes of explanatory notes. This is not an argument that we can take seriously, surely?

Stephen Timms: That is why there is a package of measures, which includes national insurance, income tax and tax credits. The overall effect of the package will particularly benefit households on the lowest incomes, as the IFS analysis rightly shows. After all, personal allowances can only cut a family's tax bill to zero, whereas tax credits can go further and make a payment to the family. Personal allowances cannot provide support tailored to a family's circumstances, such as the number of children in the family or whether a disabled child is a family member. Tax credits, by contrast, can do that and are doing it.
	If the Government invested £1 billion pounds in raising personal allowances, a low-income worker would be only 68p a week better off. Using the same money to extend the working tax credit means that workers on low incomes could see an increase in their incomes of more than 10 times as much—£7.10 a week. That is why the Budget proposals are so much better than those being made by the hon. Lady and her hon. Friends.
	The hon. Lady asked for specific figures. As a result of the Budget package, by April 2009, households will be £100 a year better off on average; households with children will be £200 a year better off on average; and in the least well-off fifth of the population, households with children will, on average, be £350 better off. The changes to make those figures possible will be in next year's Finance Bill. The House will have the opportunity to debate them then and I look forward to that debate.
	I shall gladly look further into the point made by my right hon. Friend the Member for Birkenhead, but I do not think that the package redistributes away from women to men, once the impact of tax credits is taken into account. Child tax credit is paid to the main carer, who is usually the mother, and the child element will rise by £150 a year above earnings indexation, so taken with the other effects of the package, there will not be the redistributive effect that my right hon. Friend suggested.

John Healey: Clauses 7 and 8 and schedule 1 introduce new bands and rates of gaming duty and a new duty of excise, to be known as remote gaming duty. I will start by explaining the intention behind clause 7.
	Gaming duty is charged on the gross profit—in other words, stakes minus prizes—of casino table gaming such as roulette or blackjack. That is known as the gross gaming yield. It is a banded system of taxation applied at different rates to different parts of gross gaming yield. Clause 7 will introduce new bands and rates of gaming duty for accounting periods on or after 1 April this year. The 2.5 per cent. starting rate has been abolished; the 12.5 per cent. rate increased to 15 per cent.; a new rate of 50 per cent. is introduced for the largest casinos; and the bands' limits have been increased in line with inflation. It may help the Committee if I deal with each of these changes briefly in turn.
	First, let me deal with abolishing the 2.5 per cent. band of gaming duty. At the time the current regime was implemented, a 2.5 per cent. starting rate was justified by regulations that restricted the ability of the small casinos to compete. However, the Gambling Act 2005 has removed many of the restrictions applying to casinos, such as a 24-hour delay between taking out membership and being able to play. Restrictions on the number of gaming machines have been increased. This is a growing sector that has seen a reduction in the number of restrictions placed on it in regulation through the Gambling Act, and in which the number of small casinos is declining. As a result, the 2.5 per cent. of gaming duty, which was paid by all casinos on the first £546,000 of gross gaming yield, was effectively acting as a subsidy to larger and more profitable casinos—casinos that we want to ensure continue to make a fair contribution to our tax base. The 2.5 per cent. starting rate has therefore been removed by clause 7.
	Secondly, I shall deal with the increase from the 12.5 per cent. rate to the 15 per cent. rate. Three in every five of the existing 138 casinos pay no higher rate of gaming duty than 12.5 per cent. Increasing that to 15 per cent., alongside the abolition of the 2.5 per cent. rate, increases the effective tax rate on these casinos to 15 per cent.—consistent with the rate of general betting duty.
	Thirdly, I shall explain the new 50 per cent. rate on the largest casinos. Her Majesty's Revenue and Customs estimates that the new 50 per cent. rate on gross gaming yield in excess of £10 million per six-month accounting period is likely to capture only the super-casino and a few of the high-end London casinos. Despite that, it helps to ensure that this growing sector continues to pay a fair contribution to tax receipts. Moreover, introducing the new top rate of duty now rather than later will provide any prospective bidder for the licence for the super-casino with the degree of certainty that has been looked for.
	The head of tax policy at Ernst and Young, Chris Sanger, expressed a concern back in January that not knowing what the tax liability may be for the prospective super-casino could damage the ability of a council in the area of the successful bid to generate funds for regeneration. He said:
	"When the casino companies are considering how much they can bid, they will have to factor in how much they will have to pay in tax. What we don't know at the moment is what the Treasury plans to do".
	Well, now they know.
	Finally, clause 7 will increase the gaming duty bands in line with inflation for accounting periods that start on or after 1 April this year. To revalorise the duty bandings in that way is entirely in line with the industry expectation and the practice we have had in every year since 1998.

John Healey: My hon. Friend is characteristically right. All gaming—in this case, through casinos—is required to be registered. What we have and what he refers to is a provision within the tax legislation to cover a particular eventuality. Mercifully, because we are a well regulated and well run country in that respect, we do not have to invoke the provision. The provision allows us to charge tax on the operation of what would be unregistered and therefore illegal operations, but operations that, nevertheless, may turn a profit. We would not wish them to avoid being liable for tax on that.
	Clause 8 and schedule 1 impose a new duty of excise to be known as remote gaming duty, which would apply to remote gaming providers who locate in Great Britain. It might help the Committee if I explain some of the background to the measure. Remote gaming providers provide the opportunity to participate in games of chance for a prize by means of remote communication, such as the internet, television or mobile phones. As Members will be aware, it is presently illegal for a remote gaming operator to locate in the United Kingdom. Remote gaming is therefore outside the scope of the UK's gambling tax regime. However, the Gambling Act 2005, which was ably steered through the House by my right hon. Friend the Member for Sheffield, Central (Mr. Caborn)—who I am glad to see is sitting on the Front Bench at the moment—will, for the first time, make it legal for a remote gaming operator to locate in Great Britain and to be regulated under the UK jurisdiction.
	We announced in the 2005 pre-Budget report that, following the provision made in the Gambling Act for remote gaming licences to be offered in this country, remote gaming would be brought within the scope of gambling taxation. We intend to use clause 8 to do that. It will apply from 1 September this year—the same date as the relevant part of the Gambling Act comes into force. Schedule 1 goes on to set the rate of remote gaming duty at 15 per cent. That rate of duty is liable on net receipts—in other words, payments received minus winnings paid out from the remote gaming activity. That is consistent with the taxation of remote betting, which is subject to general betting duty at 15 per cent.
	Remote gaming duty will be charged on the provision of facilities for remote gaming if the facilities are provided in relation to a remote operating licence issued by the Gambling Commission. That ensures that it is not possible to gain the legitimacy and the benefits of UK regulation without being subject to gambling taxation of any sort. If a provider of remote gaming locates in Great Britain and does not apply to hold a remote gaming licence, the provision of facilities for remote gaming by that operator will also be liable to remote gaming duty. That is a parallel provision to the one that my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) pointed out in relation to clause 7.
	Businesses that choose to relocate to Great Britain will have to register and then account for remote gaming duty on their net receipts from remote gaming. As set out in the regulatory impact assessment, the regulatory costs are modest. Her Majesty's Revenue and Customs estimates that the cost of completing a registration form will vary from £7.93 to £15.75, depending on the size of the firm. We estimate the annual cost of completing remote gaming duty returns to be about £130 for all sizes of firm. I hope that those remarks have been helpful to the Committee. I commend the clause and the schedule to the Committee.

Paul Goodman: The hon. Member for Wirral, West is getting himself into difficulty. I certainly cannot reach any conclusions without hearing from the Financial Secretary. We also want a reassurance from the Minister that the measures will not have the consequences for the industry that have been suggested.
	As the hon. Member for Wirral, West makes his way towards the Chair, may I say that although we have not heard an explanation of the measures from the Financial Secretary, others have not been shy to offer their explanations? According to  The Times, the Chancellor's announcement was interpreted as having signalled
	"his personal distaste for gambling".
	 The Guardian reported that MPs believe that the Chancellor
	"is not keen to see an expansion of the gambling industry".
	The  Financial Times reported that the Chancellor's scepticism for liberalising gambling,
	"evidenced by his decision to impose a 50 per cent. tax on big casinos in the Budget, means a Brown premiership would be unlikely to impose a new super-casino".
	Now that the hon. Member for Wirral, West is back in his place, I can tell him that the  Daily Mail reported:
	"Tessa Jowell's efforts to boost betting with the controversial Gambling Act were in tatters last night".
	It reminded readers that the Chancellor and the Culture Secretary had not exactly formed a mutual admiration society and that she had not yet been reported to have signed up to his leadership campaign.
	Such speculation is a reminder that these proposed changes in taxation are meant to be marching in step with the implementation of the Gambling Act 2005, to which the Financial Secretary referred, and, especially, the setting up of the new regional casino. However, while we have such proposed tax rises, we do not yet have the casino. Given that the casino and the implementation of the Act are directly related to the rates, let me remind the Committee of the story so far.
	The Gambling Act, which will bring the regional casino into being, was preceded by a draft Bill that was examined by a Joint Committee of the Lords and Commons. In a submission to that Committee, the Treasury said that the proposed programme of deregulation
	"raises a number of challenges and issues on tax".
	The Financial Secretary told the Committee:
	"There is a very important potential supplementary role for tax reform to reinforce and reflect the sort of regulatory changes that the Bill is looking at".
	He also said:
	"On the tax side we are inevitably at a relatively early stage".
	He told the Committee that a steering group of officials from the Treasury and DCMS had been set up in part to
	"form the modelling that is obviously essential to considering any tax options for the future".
	Brigid Simmonds of Business in Sport and Leisure told the Committee:
	"Investment will be dependent on taxation".
	The economic impact study carried out by Pion Economics for the cross-industry group on gaming deregulation estimated that inward investment could amount to as much as £5 billion. Mr. Byrne of Sun International told the Committee:
	"We have been planning to invest upwards of £500 million if the regulatory conditions are absolutely right ... and so on".
	The Government's response to the Joint Committee stated:
	"The Treasury will use this work"
	—the work of the steering group of officials with which the Financial Secretary will be familiar—
	"when it considers the options for the future gambling tax regime."
	A Bill was then introduced.
	It was reported that the Department for Culture, Media and Sport took the view that tax rates on gaming should be cut to ensure that the impact of the Bill was "revenue neutral". On Second Reading, the Culture Secretary said that this was "an error." She also said:
	"The point being made was that revenue is not a motivator for this legislation."—[ Official Report, 1 November 2004; Vol. 426, c. 30.]
	During consideration of the Bill, the number of proposed regional casinos was whittled down to one. After the Bill was enacted, a casino advisory panel recommended that one regional casino should be sited in Manchester. The House of Lords Select Committee on Merits of Statutory Instruments expressed concerns about the potential effect of the decision on problem gambling, and 83 Labour Back Benchers signed an early-day motion urging the reconstitution of the Joint Committee to examine the casino advisory panel decision. The Government then introduced a single order to put into effect the decision in relation to all 17 new casinos. As the Committee knows, in the other place the Government lost the vote on the draft order that would have established the casino in Manchester.
	Before I put some questions to the Financial Secretary, it is worth reminding the Committee of what he said about remote gaming during the passage of last year's Finance Bill:
	"It is not an easy issue. There are many factors influencing the decision by remote gaming operators about where to locate. It is not clear that the rate of remote gaming duty will be the decisive factor." —[ Official Report, Standing Committee A, 11 May 2006; c. 88.]
	Setting aside, just for a moment, the views expressed by the industry, by independent analysts and so on, I shall put a few simple questions to the Financial Secretary. First, what specific estimate has the Treasury made of the impact of clause 7 on old and new casinos, on the profitability of the industry, on investment from overseas, and on jobs? Will that estimate be published? Secondly, what modelling, if any, did the Treasury do on the impact that any new duty on online gambling would have on applications for licences by companies based overseas? Thirdly, how many licence applications do the Government expect to receive? Fourthly, does the Chancellor indeed have a personal distaste for gambling, and, if so, to what degree, if any, has it shaped his Budget decisions in these clauses?

Theresa Villiers: As I shall come on to say, I think that a pause for reflection, thought and analysis of how we can get the legislation right could have a positive impact on tax revenue. The first thing to note about schedule 3 is that the proposals are a clear acknowledgement that IR35 has failed. If the Government had got IR35 right, they would not need to bring further complex legislation before the House to attempt to police the borderline between the employed and the self-employed.
	Many hon. Members will remember that in 1999 the Government caused significant controversy in the freelance and contracted-out community with their proposals on IR35—so-called because they were not announced in the Chancellor's Budget speech, but in Inland Revenue press notice 35. The Government said at the time that that would raise £300 million for the Exchequer, and cost it just £55,000 a year ongoing to implement. However, of the IR35 investigations known to the Professional Contractors Group, 1,405 concluded that the taxpayer in question was outside IR35, and only three concluded that the taxpayer was within its provisions.
	The Government have repeatedly refused to publish any figures on the amount of revenue collected under IR35 or on its ongoing cost impact for contracts. The truth is that IR35 has been a hugely expensive failure. It has left thousands of freelancers in an uncertain tax position and created serious difficulty in planning ahead. It has cost untold millions in compliance checking, and whole galaxies of the blog universe have been devoted to the intricacies of IR35 compliance. We appeal to the Government to postpone the implementation of schedule 3 to assess the reasons why its predecessor—IR35—failed; to consider the steps needed to ensure that schedule 3 is not a costly failure in the same way as its predecessor; and to establish whether the Treasury will undertake to measure the revenue raised by schedule 3, despite its refusal to do so in relation to IR35.
	That investigation would provide an opportunity, too, to see whether IR35 is still necessary. If schedule 3 is adopted, there will be an even more complex tax framework for the taxation of freelance workers who have incorporated than there was before. Companies outside IR35 will be on one regime; companies inside IR35 will be on a second regime; and there will be a third regime for companies covered by schedule 3. Yet again, the Government have introduced highly complex and controversial legislation that is not properly thought through. They have found that it does not work properly, and to try to fix some of the problems that they created in their first round of tax law they are introducing more complex legislation that is not properly thought through either.
	I should like to take the opportunity to explode a myth peddled in relation to both IR35 and schedule 3. The proposals are not about employment protection. The impact of schedule 3 will be to change the tax status of individuals working through companies that fall within the definition of a managed service company. It will not change their employment status. Of course, it is wrong for people to be forced to give up their employment rights by being pushed unwillingly into managed service companies, but the proposals will not have any impact whatever on that problem. If the Government wish to deal with it, that is not the way to do it.
	A fundamental problem with schedule 3 is the collateral damage that it will cause. As drafted, the provision could hit many genuine freelancers who operate entirely legitimately and are genuinely self-employed—they are not employees. The consultation document asserts that the "underlying nature" of the relationships established by workers in MSCs is "almost invariably" one of employment. No evidence is given to support that assertion in the consultation document, and the Professional Contractors Group has challenged it:
	"This ignores the possibilities that MSCs can be used for commercial relationships, and often are.
	PCG has relatively few members who work via MSCs but those that do are generally conscious of IR35, have no wish to be employees and make a point of using IR35-compliant MSCs.
	Several have contacted us following the announcement of the proposed changes to make it clear that they operate commercial relationships and are in no sense employees."
	The Chartered Institute of Taxation has looked at the problem, too, and it says:
	"Our main concern is distinguishing between Managed Service Companies and Personal Service Companies...There are workers that operate through a PSC without failing IR35, but who do not have time to manage a company and will therefore outsource its functions to a professional...It is important that the legislation clearly distinguishes between these PSCs and MSCs."
	Freelancers who outsource part of the financial and administrative functions relating to their company to advisers are in danger of being caught by the provisions of schedule 3—that is a key point. Outsourcing routine administrative work to allow the worker in question to concentrate on what he or she does best, whether it is IT, engineering and so on, could walk them straight into the clutches of schedule 3. The nature of their working practices and their relationship with their end client is wholly irrelevant to their tax status under schedule 3.
	The key question is posed by proposed new section 61B (1) (d) of the Income Tax (Earnings and Pensions) Act 2003—ITEPA—which is part of schedule 3. We must ask whether
	"a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals...is involved with the company."
	That is the issue that determines tax status, and it is the relationship with specialist advisers that is critical to the whole framework. Any company involved with an MSC provider is caught by schedule 3, whether someone is genuinely self-employed and in business on their own account or not. Their factual relationship with their end client is wholly irrelevant under schedule 3.
	The Law Society expressed concern that the test of involvement is "enormously wide". The question that every freelancer up and down the country must ask is whether her professional advisers could fall within the category of an MSC provider under the meaning of paragraph (d), and it is not an easy question to answer. It is highly likely that, under the provision as drafted, it would take at least a couple of cases going through the courts to determine the answer, and the uncertainty surrounding the meaning of paragraph (d) is a critical reason for supporting amendment No. 1 and postponing the implementation of those proposals until they have been fully thought through.
	Without qualification, paragraph (d) would hit any freelancer who uses an accountant to draw up her company tax returns, so its scope is narrowed by proposed new section 61B(3), which states:
	"A person does not fall within subsection (1)(d) merely by virtue of providing legal or accountancy services in a professional capacity."
	The meaning attributed to that carve-out will be critical in determining the reach of the legislation. There are at least three possible approaches to the carve-out and the type of services that are relevant in the context. First, under a narrow approach, the carve-out would provide safe harbour only for basic, traditional accounting services such as book-keeping. Secondly, the widest definition could cover any services ordinarily provided by accountants. The third approach would apply to accounting services ordinarily provided in the course of an accountancy business.
	We need much greater clarification—that is why we need a delay and a report—about the range of services that are currently outsourced and whether they would trigger the operation of schedule 3. Those are services such as setting up and registering companies; invoicing; company secretarial services; IR35 compliance checking; routine tax advice such as guidance on the different rules governing companies and sole traders; and other assistance on regulatory compliance. Almost all those services are frequently performed by accountants, so it would not cause a problem if the second, wide interpretation is the correct one. However, if the third, middle way—the more restrictive option—is correct, the setting-up of companies and company secretarial services may fall outside the carve-out for an accountant. They are services provided by accountants, but they are more closely associated with lawyers than accountants, so they could be treated as MSC-type services if provided by an accountant, but not if provided by a lawyer.
	The Institute of Chartered Accountants has expressed concern about the issue, and it says:
	"The legislation is ambiguous about whether firms of chartered accountants and tax and business advisers who as part of their other services advise clients about the best structure through which to trade and provide the necessary company secretarial services to enable them to do so, are within the definition of 'an MSC provider'."
	Her Majesty's Revenue and Customs has indicated informally that such activities should not turn accountants into MSC providers. However, as the Institute of Chartered Accountants points out, there is no substitute for a legal definition, and we propose to table amendments in the Public Bill Committee to clarify the operation of the safe harbour in proposed new section 61B(3).
	The Opposition believe it is unfair and unwise to impose the new regime on freelancers while such uncertainty attaches to the scope of proposed new section 61B. The Chartered Institute of Taxation points out that there is a real danger that
	"uncertainty could render the legislation unworkable or difficult to enforce".
	The IR35 precedent is not a happy one. Susie Hughes, founder and editor of the specialist contractor website Shout99, said:
	"It is clear that contacting is a very complex business, and the new legislation has caused a headache for many contractors, who are still unsure about how to comply with the new rules.
	The majority of freelancers who visit Shout99 are very knowledgeable, but the last-minute changes in the Budget knocked many sideways."
	Members should be aware that the Government maintain that these rules are in force as we speak. Despite the fact that they are unclear, they were due to come into force on 6 April.
	There is another twist in the tail. A freelancer might have an entirely compliant relationship with her professional adviser which does not go beyond the provision of accountancy services within the meaning of proposed new subsection (3). However, she could still end up with MSC status if her accountant was providing non-compliant services to other companies. Her accountant's work for other companies would taint all their clients, and in assessing whether she is at any risk of falling within the scope of schedule 3, a freelancer therefore has to look not only to her own relationship with her professional advisers, but at the services that they might be offering to other people.
	This uncertainty is made even more problematic when one turns to the new section 688A of ITEPA, which is also introduced by schedule 3. That gives the Treasury the power to introduce secondary legislation to impose liability for the tax debts of an MSC and levy them on third parties. The Law Society described this section as "extremely wide" and stated that it
	"could cover a wide number of people who do not actually benefit from the provision of the MSC services."
	The Chartered Institute of Taxation has also expressed the concern that the proposals are "unnecessarily wide".
	The third parties potentially caught by the provisions are set out in proposed new section 688A(2). They include any person
	"who (directly or indirectly) has encouraged, facilitated or otherwise been actively involved in the provision by the MSC of the services of an individual".
	The phrase
	"encouraged, facilitated or otherwise been actively involved"
	indicates the potential for a much wider application of the provisions than the consultation document suggests is the Government's intention. The provisions pierce the corporate veil, leaving directors, employees and payroll clerks in the firing line. The Chartered Institute of Taxation expressed the concern that although the HMRC says it wants to target the controlling minds of a scheme provider, ordinary employees of those providers might well be hit with tax debts, as they could be seen as encouraging and facilitating the provision of services through an MSC.
	There is also no firm guarantee that I can see in proposed new section 688A that someone who works as a contractor through a managed service company will not end up becoming liable under this section. Furthermore, there is every chance that the end-client might be viewed as having encouraged the provision of services of the worker via an MSC. According to the Law Society,
	"It is quite possible that a client might be caught if it encourages involvement . . . the word 'encouragement' introduces an extremely wide concept . . . We think this goes too far and could cover something that was entirely informal where the party encouraging received no benefit and no involvement . . . it leaves too much discretion with HMRC."
	The Law Society goes on to point out that leaving end-clients on risk for the tax debts of the freelancers and contractors that they take on could have a highly disruptive effect on outsourcing in Britain.

Vincent Cable: I was not going to go that far. I assume that the Government are acting in good faith and at least trying to deal with tax avoidance. I am concerned about the practical difficulties that might result from the two different definitions. I am not here to speculate on the ultimate motives—I did that in the Budget debate.
	One can place a charitable interpretation on what the Government are trying to do. In the evidence that was given to the Treasury Committee, John Whiting, a PricewaterhouseCoopers adviser, whose name has been mentioned several times in the discussions, said of clause 25:
	"Whilst the announcement of proposals to tackle Management Service Companies was seen as controversial at the time of the pre-Budget report, the Treasury and HMRC are undoubtedly right to tackle this area. Consultations on the proposals have been constructive and the refined proposals, focusing on MSC providers, are a good way forward, though more discussion is needed to ensure the targeting is precise with no collateral damage."
	It is therefore possible to make the case that the hon. Lady and I are making more sympathetically than the hon. Gentleman suggested.
	The key point is how we distinguish in practice between MSCs and companies that fall outside the definition. The distinction is crucial because, as the hon. Member for Chipping Barnet said, companies that fall within the new definition are liable for tax debts, which can be astronomical. As I understand it, some progress has been made in narrowing the definition of the professional groups who are likely to be involved. Accountants are now excluded, but as the hon. Lady asked, what is an accountant? Are company secretarial services included? There is a spread of possible professions.
	The hon. Lady cited another definition, which she did not complete. It raised the possibility that the spread of responsibility could become wide. For example, a spouse's clause could be involved and extend to cover more distant relationships, perhaps even business partners. The limits of the liabilities are far from clear despite the moderate success of the consultation process, at least in narrowing the definition to some extent.
	It is worth citing some of the professional bodies. The hon. Lady has done that and I shall not simply repeat all her cases. The Institute of Chartered Accountants in England and Wales is a reputable organisation that has no obvious axe to grind. It stated:
	"Many of our members provide a variety of services for MSCs but are acting properly and within our ethical code and professional conduct rules. They are concerned that if the exclusion is not clarified, they could become liable for debts incurred by their clients when they have been acting entirely within the law and the professional conduct rules that govern their services."
	That professional body is trying to get on the right side of the law and not push the boundaries. It simply wants to be crystal clear about who falls within the definition of the schedule.
	I therefore believe that the sensible way forward is to provide for limited delay. I appreciate that prolonged delay can simply open the way to evasion and people finding a new way around the provisions, so I do not suggest that. However, the method that the hon. Lady proposed of a specific targeted study is one way of achieving the objective. We suggest a six-month delay to give the relevant organisations an opportunity to assimilate the secondary legislation, which we have not seen.
	The Professional Contractors Group said that it would welcome a six-month delay because the proposals had caused much confusion among legitimate small businesses, especially the question of whether accountants could be deemed to be scheme providers under the Bill. The PCG is an important voice in the debate.

Theresa Villiers: If the hon. Gentleman wants to hear what the contractor community thinks about these proposals, he should just go and visit Shout 99 or one of the IR35 websites. He would experience a lively discussion and hear some trenchant views on this Government's performance on tax matters.

Rob Marris: The hon. Lady might be right. However, I did not refer to those vulnerable workers in the way she suggests. I did not say that they did not realise that they were part of a managed service company.
	What I would describe as bogus self-employment—not in an "illegal" sense—has existed for many years. Under Margaret Thatcher's Government, milk deliverers were pushed into what most of would regard in a moral sense, though not in a legal sense, as bogus self-employment. There was a fad for it, because of the tax regime. The milkmen realised what they were doing, but they were effectively given no option by those who had hitherto employed them. It is a scandal that has continued for years, and clause 25, along with schedule 3, will help to deal with it.
	I do not think we should delay any longer. Both amendments suggest that we should, but I think that there has been enough consultation and enough knowledge of these problems for a long time, and that we should reject the amendments.

John Healey: We have had a useful debate on clause 25. The clause introduces measures to tackle the problems set out in the consultation document entitled "Tackling Managed Service Companies", which we published last December. As you rightly pointed out, Mr. Gale, schedule 3 contains the detailed provisions, to which we will return in the Public Bill Committee. I look forward to your chairmanship of that Committee, and I have enjoyed your chairmanship this afternoon.
	I am glad that we have been able to arrange to debate the clause today, uncomfortable as it is for our discussion in this Committee of the whole House. It is an arrangement that the Opposition wished for, and I am glad that we have been able to accommodate them. Many of the detailed points that the hon. Member for Chipping Barnet (Mrs. Villiers) raised clearly relate directly to schedule 3. We will return to and deal with them in detail in the debate in the Public Bill Committee, rather than tonight.
	The Opposition amendments would delay the date on which the legislation takes effect. Before I consider those, and the legislation in general, perhaps it would help the Committee if I reminded hon. Members of the rationale for legislating in this sector and outlined the consultation that we have undertaken. I hope that it will help to reassure hon. Members that we are not acting in haste, that we have considered the measures in some detail, and that what we propose is the necessary and right response to the problem that we increasingly face with managed service companies. The questions are significantly different from the questions that we may have considered with IR35 and personal service companies.
	Managed service companies are corporate structures through which workers provide labour services. What is notable is that managed service company schemes are mass marketed, and it is not appropriate to use the intermediaries legislation to try to deal with them. In the vast majority of cases, workers in managed service companies are not in business on their own account and the nature of their engagements is equivalent to one of employment.
	Mr. Gale, you and the House will remember that the House has taken action not just in the last decade but in previous decades to maintain a clear policy intent, which is that those who are, in substance, employed should be treated by the tax system as being employed. For example, between 1988 and 1996, six separate pieces of legislation were introduced by the Conservative party to counter the use of what were then termed readily convertible assets specifically to avoid class 1 national insurance contributions. The steps that we are taking in respect of managed service companies should be seen in the context of that clear and consistent intent, endorsed on occasions by the House, both in the past decade and previously.
	Those mass marketed schemes are almost always promoted on the basis that the worker will pay less tax. Let me refer to one or two such schemes and quote the sort of publicity that those companies were issuing before the pre-Budget report announcement in December. Nova Corporate Services said:
	"Our aim...Established in 2001, Nova was set up with one goal in mind—to increase the take-home pay of its members: self-employed people, frequently in temporary employment and largely working through employment agencies.
	The result—less tax! Individuals who choose to work through a Nova company pay considerably less PAYE (income tax) and National Insurance than those who continue to be paid directly by employment agencies."
	Around the same time, before the pre-Budget report announcement, Brookson detailed the advantages of working through a managed service company:
	"Well, for a start we can make your life easier by taking care of all your paperwork and handling all your tax issues. As well as saving you time we can also save you money by reducing the amount of tax payable increasing nett pay by anything up to 30 per cent. For a very competitive weekly fee Brookson will"—
	and it goes on to detail precisely how the company will, essentially, take away any suggestion that an individual, through an MSC, is managing their own affairs or involved in that. It then says:
	"With every aspect of administration and accounting taken care of, you are free to concentrate on what you do best—your job."
	I could refer to a number of other examples that I have brought into the Chamber with me. If I could read Polish, I could quote similar provisions set out in Polish to attract foreign workers, binding them in from the start of their employment—disguised employment—in this country in this way.
	Let me give Members an idea of the scale of the tax benefit, and therefore of the artificial tax arrangements and their impact. Currently, an employee earning £30,000 who incorporates for tax purposes will pay £4,290 less tax and national insurance than other employees on the same salary. It is important to be clear that such workers are being encouraged to use incorporation as a means of disguising their real employment status. We are trying to tackle that.
	Workers in MSCs are shareholders in the company, formally. Generally, they are paid a combination of salary at the level of the national minimum wage and dividends, on which a lower rate of income tax applies and on which no national insurance is levied. That is the nature of the tax gain, and it shows the artificiality of the tax arrangements.
	Under existing rules—the intermediaries legislation, often known as IR35—employed levels of tax and national insurance should be paid, but in most cases the rules are not followed. That a large and growing number of workers are involved in these mass marketed schemes makes it difficult to enforce them. That is why we need fresh legislation in this area. The use of MSCs has grown sharply in recent years. It is estimated that in 2005-06 240,000 workers were in MSCs. As I hope Members appreciate, there are obvious difficulties in quantifying the impact and the figures, but the Government consider this to represent a significant and unacceptable risk to the public purse, which we cannot allow to continue. The estimated yield from this proposed legislation in 2007-08 is about £350 million. Furthermore, we aim that it will deter future use of MSCs and protect the Exchequer against future losses.

John Healey: From the outset we have constantly made it clear that our intention is that the legislation will not hit those working through personal service companies. The legislation was drafted with that intention and it remains our clear purpose, so I hope during this debate and in the Public Bill Committee to convince the hon. Lady that that will be the effect of our proposals.
	At the pre-Budget report, when we published the draft definition of MSCs—the starting point for the provisions in clause 25—it focused on the question of who controlled the company and its finances. The hon. Member for Twickenham (Dr. Cable) was interested in that point. As the hon. Member for Falmouth and Camborne (Julia Goldsworthy) mentioned tonight, and in more detail on Second Reading, we soon realised that some MSC providers were intending to move their MSC workers to companies as directors to give the impression that workers were in control of the company. The hon. Lady claimed that the setting up of such new companies was evidence that the MSC measures would not work. However, the fact that some MSC providers act in that way because they are determined to get around the legislation—combined with the comments of some of the respondents to the consultation that the definition needed to be tougher and more robust—is precisely why we revised our approach, instead focusing more on the business of the MSC provider. That will be more effective because it will enable HMRC to focus on the smaller number of MSC providers.
	I hope that the hon. Lady will accept the views of David Heaton, a tax partner in the Baker Tilly accountancy firm and employment consulting group. Writing in a tax journal in April, he said:
	"This looks to be a very elegant solution to the difficulty that seemed likely to undermine the new rules. The Treasury is to be congratulated on its consultation exercise and, more importantly, on being prepared to listen and change tack to produce workable new law."
	That, indeed, is what I hope that we have produced—workable new legislation. Clearly, we await what happens in practice, but I am encouraged that we are moving in the right direction.
	There is a specific exclusion from the definition of an MSC provider of those merely providing legal and accountancy services in a professional capacity. Let me make it clear that even where this specific exclusion does not apply, the purpose of the legislation is not to include within the definition of an MSC provider accountants, tax advisers, lawyers and company secretaries, who provide advice or other professional services to companies and individual clients. Those parties are not in the business of promoting or facilitating the use of companies to provide the services of individuals. Nor are they regarded as involved with the company in the way that the legislation envisages. In other words, simply because someone is not exempt by virtue of proposed new section 61B(1)(b) does not mean that they are caught by the legislation.
	The legislation specifically excludes employment businesses and agencies from the definition of an MSC provider. That is because we accept that some of the activities that employment businesses and agencies undertake legitimately as part of the business of placing work seekers superficially resemble what MSC providers do in running their clients' companies. In that respect we recognise the important and legitimate role that those businesses play in the temporary labour market, and it is not our intention to disrupt that.
	The hon. Member for Chipping Barnet spent some time on the transfer of debts provisions, so I would like to say a few words of reassurance to members of the Committee about them. The legislation aims to deal with a further problem that we identified with MSCs: that they have often escaped payment of tax and national insurance contributions because they have no assets. Where a debt is established, MSCs are often simply wound up and then begin to trade again. They trade again because their workers are transferred to a new MSC by the MSC provider. Respondents to the consultation were consistent in agreeing that the wider package of measures would be ineffective without debt transfer provisions.
	Where the MSC does not pay, the legislation will allow the PAYE debts of MSCs to be transferred to appropriate third parties, such as the MSC provider or the director. Those parties are clearly involved and clearly benefit from the arrangements. If payment cannot be obtained from those parties, the debts may be transferred to others who have
	"encouraged, facilitated or otherwise been actively involved in the provision by the MSC of the services of the individual".
	Without a provision to transfer debts, the entire purpose of the legislation would be lost. Those benefiting from the arrangements would simply be able to continue promoting and using these schemes with no financial risks. Of course, transferring debts to third parties is not a new principle in our tax system.
	For those concerned about the transfer of debt, there is, frankly, a simple answer: not to operate through or encourage others to operate through MSCs. I recognise that there are nevertheless some concerns and I am sure that we will return to schedule 3 in greater detail in the Public Bill Committee. The regulations for the PAYE provisions were published for comment back in February and the consultation closed today. We will consider any comments very carefully and take full account of them in finalising the regulations, which we aim to publish them in June. The regulations will contain a number of safeguards and grounds for appeal. The debt transfer provisions are intended to be effective for PAYE and national insurance contributions incurred from 6 August in respect of MSC directors and MSC providers, and from 6 January next year for other parties.
	I have dwelt for a moment or two on how the provisions might work, because I thought that it was necessary to do so to reassure Members that the Government have considered the issue in detail and have discussed it in detail with the relevant parties. I also wanted to try to allay the concerns and correct some of the misinformation and the misunderstandings that have been evident. I hope that what I have said has helped to reassure Members that the amendments are not necessary, or desirable.
	Let me elaborate briefly on those points specifically in relation to amendments Nos. 1 and 14. The amendments are not necessary because the legislation was published for consultation last December, alongside a partial regulatory impact assessment. During the course of the consultation, officials dwelt in detail on the proposals with a wide range of parties. We received 81 written representations and we set out the points that were made in a summary of the consultation responses, which I published last month. Not only did the consultation confirm our analysis of the problem and the need to tackle it, it provided the further evidence that we needed to inform the full regulatory impact assessment, which was published at the same time as the Finance Bill and which covers many of the issues that the hon. Member for Chipping Barnet is concerned about in her amendment. Importantly, the responses to the consultation have allowed us to refine the approach that the legislation takes in a way that enables us to deal with the key concerns that have been raised.
	Finally—[Hon. Members: "Hooray!] I am sure that Opposition Members would not wish me to treat in a cursory way the detailed points that have been raised in the Committee proceedings this afternoon—even though I missed the contribution made by the hon. Member for South-West Hertfordshire (Mr. Gauke).
	The recruitment and MSC sectors have already responded to the announced changes and are operating the new rules. I have been encouraged by the willingness of many in the industry and their representatives to work to make the measures effective. Introducing a delay would mean that companies that are already operating the new rules would be thrown into confusion and uncertainty. It would send a signal to those seeking to exploit the use of MSCs that we may not be serious about tackling the abuses. I have to say to the hon. Member for Falmouth and Camborne and the hon. Member for Twickenham that delaying the implementation of the provisions until November, as amendment No. 14 envisages, would constitute a loss of anticipated revenue to the public purse of about £50 million.
	In conclusion, we set out clearly in the consultation the serious and growing problem of mass marketed MSCs. We consulted widely. We discussed our proposals in depth. We altered the approach, as set out in the Finance Bill. The clause will help us to tackle bogus companies and it will restore more even conditions. Currently, those observing the existing rules lose out. It will protect the public purse from the sort of artificial tax arrangement that means that people who should be employed, and are in effect employed, are not paying the levels of tax that they should be paying as employed people. I commend the clause to the Committee.

Question accordingly negatived.
	 Clause 25 ordered to stand part of the Bill.
	To report progress and ask leave to sit again.— [Kev i n Brennan.]
	 Committee report progress; to sit again tomorrow.

That the draft Disability Discrimination Act 1995 (Amendment) (Further Education) Regulations 2007, which were laid before this House on 22nd March, be approved.— [ Liz Blackman.]
	 Question agreed to.

Andrew Slaughter: On cue, having heard enough, the Conservative councillors, as they had on every occasion when challenged by their constituents, rose as one, left the meeting, and then, we are told, with no further discussion ratified all the cuts that they had proposed in secret. There is nothing in the papers that were before the council to rank one voluntary group against another. There is nothing to justify the percentage of the cuts. There was no consultation on the proposals with the groups or with the wider community. In 20 years in local government, I have never seen a process conducted with less openness or propriety.
	I have said enough on the process; I shall say a few short words on the cuts. I mentioned Hammersmith and Fulham Community Law Centre. It is a body with a national reputation that employs 12 highly qualified solicitors who offer expert, professional legal advice. It is the only organisation in the borough that does so. That is my opinion and that of many others, including the shadow Attorney-General, who many years ago sat on the board of the law centre and is, I believe, an admirer of its work. It was set up in 1979 and its primary role is to serve the local community. I note that in the last calendar year it dealt with more than 1,900 housing cases, almost 2,300 immigration cases, and a substantial number of employment, welfare benefit, asylum support and many other miscellaneous cases.
	It goes beyond that, however. The law centre has been the occasion of many significant legal decisions in this country and often involves representation up to the House of Lords and the European Court. Many well-known cases have gone to those courts as a consequence of local cases that have started in Hammersmith and Fulham. It is the repository of an irreplaceable degree of expertise and experience, and yet it is to have its budget cut by 60 per cent. It is also the bedrock for the community in Hammersmith and Fulham. It provides training and advice to other voluntary sector groups and it may well be being targeted for cuts for exactly that reason.
	I have mentioned the Horn of Africa group, and numerous other refugee organisations have also been targeted for cuts: the Iraqi Association and the Kurdish Association are both losing 100 per cent. of their grant. The Third Age Foundation, which helps older people who are unemployed back into work, is losing 100 per cent. of its grant. I hosted a successful reception for that body on the Terrace a few months ago, and the Opposition pensions spokesman came and spoke in praise of the organisation and its work. Organisations that support the community, such as the Hammersmith community transport project and Caring for Carers, are also losing 100 per cent. of their grant. Only two months ago, I noticed the latter organisation in a glossy photograph in the local council propaganda sheet with the mayor saying what a wonderful job it was doing. It is an extraordinary act of not only belligerence but hypocrisy that now all those organisations are to lose all their grant, and many others, particularly the advice centre, are to lose some of their grant. Given the overheads that we all know that voluntary sector organisations work to, that will make it almost impossible for them to survive.
	I know that other councils, especially the new Tory councils elected last May, have their eyes set on cutting the voluntary sector. Last week, I met a solicitor from Camden Community Law Centre, which is fighting a fierce campaign against the Tory-Liberal council there. I doubt whether the same scale or approach apply—perhaps they do in Croydon—in other local authorities. I do not know why it is happening. We may find out through judicial review or as the campaign against the cuts takes off. It may simply be due to the arrogance and inexperience or political extremism of those running the council.
	I found an extraordinary comment—it is a matter of public record—from one of the Conservative councillors about the law centre's grant. He said:
	"The absurd situation has been allowed to develop where taxpayers fund the Law Centre who act on behalf of 'clients' who are actually taking the council to court. We are paying the people who are suing us!"
	There is a clue to the reasons for the cuts. It never entered the mind of the little sprog who wrote that that there might be a reason for the law centre to sue the council, but it gives an interesting insight into the totalitarian mindset of the Conservative party under the stewardship of the right hon. Member for Witney (Mr. Cameron). If the reasons that I outlined or more overtly political ones are those for the cuts—I suspect that they are—it is a further disgrace.
	Most of the cuts have been made to organisations that support the homeless, the unemployed or refugees. They match the cuts in the statutory sector to social housing programmes, community schools and social services. There is a concerted campaign from the Conservative council to remove services from vulnerable people to transform Hammersmith and Fulham into the nightmare, literally care-free borough that its predecessors in fanaticism in Wandsworth and Westminster wrought.
	I do not expect the my hon. Friend the Parliamentary Secretary to fight our local battles for us. The Hammersmith and Fulham voluntary sector funding campaign, which was established last Thursday, will do that ably. It plans to reverse the cuts with the aid of its supporters locally and nationally. I ask my hon. Friend to examine what Tory councils such as Hammersmith and Fulham do to the voluntary sector, and work with voluntary sector organisations locally and nationally to highlight the need for their services, not for the benefit of councils, the Government or even the organisations, but the people—especially the vulnerable people—whom they serve and whom I represent.

Edward Miliband: I congratulate my hon. Friend the Member for Ealing, Acton and Shepherd's Bush (Mr. Slaughter) on securing the debate. I know that he is a long-standing champion of the voluntary sector in his area, as he showed so eloquently in his speech. He did much to help the sector in Hammersmith and Fulham during his nine years as leader of the council. He is right to say that I had the pleasure last May of meeting some of the local groups in Hammersmith and Fulham at the west London citizens event. It testified to the great diversity and strength of the sector in Hammersmith and Fulham.
	No hon. Member can fail to have sympathy with the case that my hon. Friend makes. He talks about cuts to organisations that represent some of the most disadvantaged people in our society—the homeless, refugees and those urgently in need of access to the law.
	The debate goes to the heart of the future of the voluntary sector, not only in Hammersmith and Fulham but everywhere. It does that because it deals with the central fact that local authorities are at the front line of the drive to ensure a thriving and successful voluntary sector.
	When it comes to representation and campaigning, the voluntary sector needs a local authority that genuinely listens and understands that a strong democracy comes from a diverse range of voices. When it comes to public services, the sector needs a local authority that understands the potential of the voluntary sector—as in the case of the law centre that my hon. Friend mentioned—but also recognises its responsibilities to provide adequate public funding.
	When it comes to building community—again, my hon. Friend spoke eloquently about groups in Hammersmith and Fulham—the third sector needs a local authority that understands its need for small grants to do the vital work that keeps our communities strong.
	Above all, we need local authorities that recognise the need for partnership with the local voluntary sector and understand that local authorities such as Hammersmith and Fulham play an irreplaceable role as the democratically elected voice of local people but that the voluntary sector can reach people and places that the public sector on its own cannot reach.
	The question at the heart of my hon. Friend's debate is: how do we secure the strong voluntary sector in Hammersmith and Fulham and what do we learn from his remarks today? I have been round the country as part of our third sector review, talking with local organisations about their relationship with local authorities. We in the House need to be clear that central Government can play an important role, but we also need to understand the role of local politics. I want to talk about those two issues in responding to my hon. Friend.
	Central Government need to send clear signals in the framework that they set about the need for partnership. The commitments in the local government White Paper and the Local Government and Public Involvement in Health Bill, which is currently before the House, are, I hope, a major step forward in that regard. There is a new duty on local government to ensure the participation of local citizens. Through that, the voluntary sector will have a greater voice in local strategic partnerships, the forum for policy-making in local authorities.
	The Government's ambition is also for some of the key commitments in the compact—the agreement governing the relationship between the public sector and the voluntary sector—to be part of the financial codes for local government. There is a strong expectation that three-year funding, which is being introduced for local government, will be passed on to the voluntary sector. We hope that, as part of the local government performance indicators, there will also be a clear acknowledgement of the role of the local voluntary sector. Those commitments are also supported by the compact and, now, by the new commissioner for the compact, an independent body at arm's length from Government, to encourage best practice. Those are important commitments from the centre of Government, and there are others, but there is an important truth in my hon. Friend's debate that we should acknowledge. If we are to uphold the role of local government as the voice of local people, the culture change that we want to see will need to come from local government itself or, if the change is not forthcoming, from political change at local level.
	That brings me to some specific observations about Hammersmith and Fulham and to my hon. Friend's suggestions about the way forward. Five points stand out from my hon. Friend's remarks. First, he is right to suggest that the voluntary sector should never be seen as a soft touch for cuts in funding. The cuts in funding that he described hit some of the most vulnerable groups in Hammersmith and Fulham. We should be under no illusions: it will often be the most vulnerable members of the community who will suffer from cuts in funding. He outlined in detail the disadvantaged groups that will suffer from the significant overall cut that, I understand, is planned for next year in Hammersmith and Fulham.
	Secondly, the voluntary sector draws its strength from its diversity. In our approach to the funding of the sector, we in central Government are trying to respect and encourage that diversity. At local level, the local government White Paper urged a continuation of grants as well as contracts. That is especially important for the smallest organisations, particularly those representing the most marginalised groups. The local compact drawn up by Hammersmith and Fulham provides a commitment to what should be possible. All partners agree to
	"take account of the diverse nature of the voluntary and community sector and use a variety of methods to encourage socially excluded groups to participate."
	That is why we are all concerned to hear about the cuts for the smallest organisations that my hon. Friend outlined, such as the 100 per cent. cut in funding to the horn of Africa group, the 100 per cent. cut in funding to the domestic violence intervention centre or the 100 per cent. cut in funding to the senior citizens creative arts and lunch club.
	Thirdly, it is essential both that central Government and local government do not use the role of the voluntary sector as a way of providing public services on the cheap and that they provide funds on time, taking account of the full costs that organisations face. The cuts to Hammersmith and Fulham law centre that my hon. Friend described are obviously of concern, since I know that law centres round the country do great work for those who have least access to legal representation.
	Fourthly, as the compact makes clear, it is important that all decisions are transparent, which, in a way, is what is most concerning about the remarks that my hon. Friend made and the issues to which he has drawn attention. Reasons for decisions need to be clearly explained. There should be ample opportunity to discuss decisions in advance and, where appropriate, for those decisions to reflect arguments that are made. My hon. Friend suggested that that had not happened, which is obviously a significant matter of regret.
	I draw my hon. Friend's attention in that context to an organisation called the Public Law Project, which has taken action against another council, precisely over the form of consultation that took place. The law centre will take its own view on whether it should take action against the council, but I would draw his attention to the case that I have described and the work of the Public Law Project.
	Fifthly, it is crucial that public authorities respect the voluntary sector organisations' desire to combine campaigning and advocacy with public service provision. Because of this, some public authorities might find themselves funding organisations that sometimes campaign against them or challenge them, but that is part of how important social change happens. Many of the changes of the past 10 years would not have happened without voluntary sector campaigning. It is fundamental to what the sector does. I see the hon. Member for Croydon, Central (Mr. Pelling) nodding in agreement.
	I welcome the new statements from the chair of the Charity Commission which clarify the right of charities to pursue advocacy and campaigning. The national compact states that the Government must
	"recognise and support the independence of the sector, including its right within the law to campaign, to comment on Government policy, and to challenge that policy, irrespective of any funding relationship that might exist."
	As I understand it, the compact drawn up by Hammersmith and Fulham borough partnership included an identical commitment. Ceasing to fund an organisation because it has helped to represent people against the council would therefore certainly not comply with the terms of the compact.
	My suggestion would be that the law centre take up the issue with the compact advocacy programme, which is operated independently from the Government by the National Council for Voluntary Organisations. It can advise on using the compact to improve relations with central and local government, and make representations to public bodies on behalf of voluntary sector groups.
	My hon. Friend has highlighted the important wider issue of the right of organisations to campaign and advocate. I will draw the attention of the new commissioner for the compact, John Stoker, to all the issues that my hon. Friend has raised. I am obviously disappointed, as all Members of this House should be, to hear of the issues in Hammersmith and Fulham—not just the cuts to important projects but the apparent questioning of the right to advocacy and campaigning.
	In the end, the real solution to the problems described by my hon. Friend involves politics and the collective ability of individual organisations and political parties to make change happen. But it also requires the right council leadership that will listen to and understand the role of a thriving voluntary sector and see the need to make it a priority. This is partly about how we view the relationship between the voluntary sector and the state. Do we see the sector as a replacement for the state, funded from private income rather than taxpayers' money? Or do we understand that partnership means the state putting its money where its mouth is?
	I am proud of the fact that central Government funding for the voluntary sector has seen a 96 per cent. real-terms increase since 1997. My hon. Friend has drawn our attention to a range of important issues tonight, but one in particular stands out. It is easy to make promises in opposition, but much harder to hold to them in practice. It is easy to have photo opportunities and warm words, but much harder to do the long hard slog of enabling people to build a thriving voluntary sector.
	I would say to the Opposition that we are watching the situation, not only in Hammersmith and Fulham but elsewhere. If the trends that my hon. Friend has highlighted continue, it will be a clear sign that warm words and commitments to the voluntary sector are simply not being honoured in practice. I am sure that the people of Hammersmith and Fulham will be grateful to my hon. Friend for drawing our attention to the issues he has raised tonight. I am sure that the voluntary sector in the borough will be particularly grateful, and I hope that it will make its voice heard and be able to thrive in the years to come.
	 Question put and agreed to.
	 Adjourned accordingly at eighteen minutes past Ten o'clock.